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About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ... (More)

About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved downtown in 2006 and enjoy being able to walk to activities. I do not drive and being downtown where I work and close to the CalTrain station and downtown amenities makes my life more independent. I have worked all my life as an economist focusing on the California economy. My work centers around two main activities. The first is helping regional planning agencies such as ABAG understand their long-term growth outlook. I do this for several regional planning agencies in northern, southern and central coast California. My other main activity is studying workforce trends and policy implications both as a professional and as a volunteer member of the NOVA (Silicon Valley) and state workforce boards. The title of the blog is Invest and Innovate and that is what I believe is the imperative for our local area, region, state and nation. That includes investing in people, in infrastructure and in making our communities great places to live and work. I served on the recent Palo Alto Infrastructure Commission. I also believe that our local and state economy benefits from being a welcoming community, which mostly we are a leader in, for people of all religions, sexual preferences and places of birth. (Hide)

Sequestration--Small but Stupid

Uploaded: Feb 26, 2013

Federal budget spending will be reduced by $85 billion from current levels starting on March 1 if no action is taken to modify or postpone the sequester.

These reductions are small in relation to the overall economy, poorly targeted in terms of promoting economic growth or attacking the major causes of spending growth and stupid, as they were planned to be in the hope the both political parties would come together to develop a smarter approach to deficit reduction.

The reductions are small in the sense that the $85 billion would reduce growth in the economy by perhaps 0.5% from say 2.2% to 1.7% in 2013. Job growth might be reduced from 2.2 million jobs to 1.5 million. But even this is an exaggeration of the immediate impact because half of the budget reductions would be for spending authorized this year but to take place later.

In characterizing the job cuts, many media reports mention the number of jobs that will or could be affected by furloughs. So the number 64,000 is mentioned as potential civilian defense job cuts, when in fact that is the total number of civilian defense jobs in California for which some workers will be asked to take one day off every two weeks without pay. I don't mean to minimize the impact of these cuts on individuals and specific services but a furlough is different from a job loss.

Because the cuts are targeted some areas of the economy and public services would be hit harder while others including Social Security, Medicaid, most of Medicare, food stamps, the active military force and most veterans programs would see no reductions.

There could well be service reductions at airports as air controllers and TSA personnel take furlough daysone unpaid day off every two weeks. The same is true for national parks and the federal programs for educationspecial education, school lunches, and Head Startwill see budget reductions. And under the sequester plan, half of the budget reductions would come in defense spending on non-military personnel and contracts.

I characterize the planned sequester as stupid for several reasons. One is that the sequester only addresses one of the major spending areas in the budgetdefenseand leaves unaddressed major benefit programs in health care and elsewhere. These benefit programs should be included in any successful long-term deficit reduction plan.

Two, the sequester does include areas of investing for our future where I think preparing for future prosperity requires more, not less funding. This includes areas of investing in people, research and infrastructureall foundations for economic growth. So the sequester includes reductions in grants to universities and other organizations for research in health, energy and technologyall of which take us in the wrong directions in terms of preparing for the future.

The big money is in defense and benefit programs including the largest cause of long-term budget fears, rising health care costs combined with an aging population.

So one debate over deficit reduction is what is the smartest way to allocate the reductions, which are often reductions in the growth of spending. Citizens or political parties saying "not here" are not helpful to reaching agreement on "if not here, then where".

The planned sequester also does not include two elements of smart long-term deficit reduction where the political parties have strong to moderate disagreement.

There is strong disagreement about whether reducing tax credits and deductions for individuals and corporations should be part of deficit reduction. We have settled the issue of tax rates but, for example, Martin Feldstein, a conservative economist, wrote recently in the Wall Street Journal that a 2% cap on tax deductions and exclusions would reduce the federal deficit by $2 trillion over a decade.

Obviously the more that deficit reduction occurs from raising revenues through reducing deductions and tax credits, the less that will have to come from service cuts or reductions in payments to individuals.

The second principle, on which there should be some agreement, is that deficit reduction should start small but build over time. Starting small is to avoid restraining growth at a time when we are still digging out of the recession.

Building deficit reduction over time is because the problem just gets worse in the second ten years so solving the problem only until 2022 does not solve the problem.

There are some obvious deficit reduction ideas that embody both starting small and building to a larger level over time.

Changing the price index used to calculate Social Security and other benefits that go up with inflation is one such approach. If there is $1 trillion in payments per year tied to price increases and we lower the inflation adjustment by 0.5% per year, the savings are $5 billion in the first year, $50 billion in the 10th year and $100 billion in the 20th year.

Similarly if we ask all but the poorest residents to pay a slightly higher share of Medicare costs, the amount of savings would increase each year as health care and Medicare costs go up.

And Feldstein suggests that we can phase in the 2% cap on deductions, in line with the idea of starting small and building to a larger deficit reduction as the economy improves,

If we can come together and address the major areas of budget spendingdefense and benefit programsand allow a portion of deficit reduction to come from reducing tax deductions and credits (we can argue whether this should be limited to people making more than $400,000 or $200,000 or $100,000), then we will reduce the deficit successfully and for the long-term.

That will leave us space to invest more, not less, in our children, in our infrastructure and in federal support for science and R&D fundingall especially important to California and Silicon Valley.

I hope the sequester just goes forward, stupid or not. I want to see what actually happens. Fear mongering has been a long time game in Washington, DC. Obama suggested it, so let it happen.

It might be that ham-fisted things like the sequester is the only way that gets action in DC. It clearly has gotten Stephen Levy's attention...he is worried about cuts in spending growth among his favorite programs.

Even with sequestration, we will still spend more this year than last year. Exactly how is this a 'cut'? It isn't. It is a "cut" in increased spending. Like saying "I expected a $1,000 raise, and got only $956, so I got a cut".

Of course, without an actual budget, now going into our 5th year, who can actually count anything?

I call you one sequester, and raise you one more next year. Ita is the one idea Obama has had I support. If he can't figure out where to cut, then cut across the board.

Stop increasing our spending and borrowing. Stop stealing from the next generations.

Posted by stephen levy,
a resident of ,
on Feb 27, 2013 at 11:17 amstephen levy is a registered user.

There are plenty of folks casting blame on one or both of the political parties.

My take is that the dilemma is ours as voters. We send clear signals that are in conflict-low taxes and high spending.

I wsa hoping that posters might suggest solutions that crossed party lines.

For me I am willing to have Medicare recipients pay a higher share of the costs and use a lower price escalation factor for benefit programs like Social Security. My preference would be for the increases to be targeted to higher income groups including myself.

I DO have "favorite programs" but my hope is that these are universally agreed to be favorites--investing in people, research and infrastructure. They are relatively small items in the budget but the ones that help prepare for future prosperity.

Perspective raises a legitimate point about future generations. My take is that these investments and figuring out ways to provide better education at all levels is our best gift to our children while working to reduce the deficit over time.

I would close or cap tax deductions or credits focused not just on very high income folks as part of deficit reduction.

What ideas do readers have for solutions that might work and pass Congress?

Posted by Crescent Park Dad,
a resident of ,
on Feb 27, 2013 at 12:12 pm

The idea of capping deductions (instead of trying to eliminate and/or save individual deductions) is probably the best way to close loopholes without getting knee deep in special interest wrestling.

I can easily see both Houses and both parties going-on endlessly on what should be eliminated/closed/modified. Why not just set a limit, either by total dollars or by a percentage of gross income (no matter the source), and be done with it?

Am I being too simple on this concept?

The qualifying deductions do not go away - you can mix and match any way you want to get to the limit. But the limit is the limit.

Sequester is doing what it should. What government agencies are doing is being vindictive and cutting it in a way that impacts service rather than really cutting the fat. Gotta keep paying those high benefits.

Posted by Nice work if ya can get it,
a resident of ,
on Feb 28, 2013 at 10:03 am

> Increase the age of eligibility for Social Security and increase the cap on upper end earners.

Social Security has never added a dime to the deficit. It has a $2.5 Trillion surplus that lasts for 30 years and after that pays at least 75% of it's benefits for the next century. It is NOT an immediate problem, and can be rectified with a simple fix: removing the cap of SSI tax for incomes over $100K/year.

Then Social Security would be solvent, virtually forever, at current benefit levels.

To bring up Social Security in the context of the Sequester budget questions is a straw man, pure and simple.

Bring all tax rates to the Clinton era rates. Cut DoD spending to Clinton era spending. In fact, cut ALL spending to Clinton era spending (after a stimulus to get job growth up

>Social Security has never added a dime to the deficit. It has a $2.5 Trillion surplus

That money is required to be invested in U.S. Treasury bonds, which pay interest from the general fund...this adds to the deficit. More importantly, that money has already been spent. There is no lockbox with $2.5 Trillion in it. Social Security is only as solvent as the general fund is solvent. SS has already crossed the line where its intake is less that its output.

Posted by Nice work if ya can get it,
a resident of ,
on Feb 28, 2013 at 11:38 am

Social Security has an account with $2.5 Trillion in it, and yes, "SS has already crossed the line where its intake is less that its output" as planned, that's why Reagan doubled the payroll tax in the largest middle class tax hike ever.

They are IOUs promised by the general fund. Fiat money is backed by nothing other than promises, thus the confidence in the currency is essential. Massive deficits undermine this confidence. IOUs are worth very little, unless the confidence in the currency is maintained. Printing money does not increase confidence in the currency.

Posted by stephen levy,
a resident of ,
on Feb 28, 2013 at 3:28 pmstephen levy is a registered user.

John and Nice Work both make valid points but in the end I think there is a case for including adjustments to Social Security as a small part of future deficit reduction.

It is true that past contributiosdn are sufficient to cover promised Social Secuiryt benefits for 20 years or so after which they cover 75% of currently promised benefits.

But it is also true that in fact benefits are paid from the same funds that pay for defense and Medicare and other programs and that starting last year current Social Security taxes are less than benefits.

Small changes such as raising the limit on earnings subject to tax, reducting the price index used to increase benefits or otherwise slightly reducing the benefits to high income folks would both help provide funding for benefits past 2033 and, more importantly, help reduce future budget deficits and debt accumulation.

Social Security can be an important part of the solution even if it is not a major factor in deficit creation.

Posted by Nice work if ya can get i,
a resident of ,
on Feb 28, 2013 at 4:19 pm

>Are you implying that T Bills are useless?

Can't answer that, can you?

Every country and investor in the world is LINED UP to hand the US money for safekeeping (in the form of treasuries) at some of the lowest interest rates IN HISTORY. Almost at a negative interest rate in the last couple years.

Yet Johnny wants to talk about how there is no confidence in those pesky IOU's.

John: do you own any treasuries? Any treasury backed funds or other securities?

Back to the point: bringing Social Security into the argument, just to shovel austerity measures onto our elderly, is a straw man. If Johnny-boy is serious about shoring up Social Security, just remove the cap (at 100K/yr) on SSI taxes. Then you can return the $2.5 Trillion SS account.

>John: do you own any treasuries? Any treasury backed funds or other securities?

No, none. I tend to invest in commodities. Real deal things that help to imrprove the human condition. I don't oppose fiat currencies, as a model, but I am very cautious about investing in them. Too much true belief for me, but that is just me.

Posted by stephen levy,
a resident of ,
on Mar 2, 2013 at 10:54 amstephen levy is a registered user.

This time John and Nice Work went off track a bit.

Social Security is not on "thin ice" although small changes could improve its long-term sustainability and contribute to defict reduction.

The "shovel austerity measures on our elderly" seems way off track to me.

The future deficit is largely the result of increasing benefit payments to elderly residents. These promises are crimping investments in our youth that are critical for long-term competitiveness and prosperity.

While I would protenct low-income seniors from benefit cuts I would ask higher income seniors including my wife and I to pay a bit more so we can invest more in our kids and in research and critical infrastructure.

Just as many older resdients in Palo Alto tax themselves to pay for school funds for today's children, the older residents in the country who are doing well need to step up and contribute to deficit reduction so we can protect investments for the future.

Social Security does not have a lockbox of funds (of real assets, like gold)...all those funds have already been spent. What SS has is an account full of IOUs. The general fund of the U.S. federal government is responsible for assuring SS benefits. This is a fact, Stephen, and I doubt that you would disagree, since no serious economist would disagree.

The question then becomes, will confidence in the American government (dollar) remain high, or will it be realized that China has a lot to say about that. Quantitative easing, multiple times, will eventually lead to inflation. SS benefits are, at this point, adjusted upwards for inflation. The demographic wave facing SS is daunting. There is a perfect storm facing SS, and it is, indeed, on thin ice.